Modern medical practices are often complex businesses that routinely manage large quantities of detailed clinical and financial data. Primary attention is, of course, focused on patient clinical data, as these data are fundamental to patient care. Financial data, though directly related to clinical data, receive secondary attention through such business activities as billing, collections, accounts receivable management, accounts payable management, and financial reporting.
Medical practices frequently operate in ways that treat clinical and financial data as separate and minimally-related matters. However, integration of clinical and financial data can provide valuable information that most industries rely upon for production cost control and operations management. Most medical practices rely on standard financial reporting information to guide business decisions, with minimal or no detailed information about the costs associated with the production of services. Where cost information exists, it is usually found for frequently-performed diagnostic or surgical procedures. Cost analysis for all procedures or services represents a task that is generally beyond the medical practice's analytical capabilities or economic resources.
Traditional cost accounting is based on the allocation of direct and indirect costs to production departments. The assignment of direct costs to respective production departments is usually readily accepted. However, the rationale for allocation of indirect costs among production departments is typically more subjective and arguable. Furthermore, when significant costs are allocated to departments that produce great varieties of unique outputs, which is often the case in medical specialties, the assumptions supporting the allocation of indirect costs may be challenged for a number of theoretical or empirical reasons.
Activity-based costing (ABC) is more arduous than traditional cost analysis as it requires detailed information about actual activities that are generating costs—information that is often difficult and costly to develop and manage. Nevertheless, ABC produces information that is much more useful managerially because attention is focused directly on the services or products generating costs rather than on departments, cost definitions, or cost allocation strategies.
The essential requirements for ABC are as follows: Specification of the produced services, determination of costs associated with producing the services, and identification of cost drivers that permit allocation of costs to the produced services. The determination of medical practice production costs is based on generally-available financial data, with adjustments made for identified overstatement or understatement of costs. The greater challenges in medical practice ABC come from the difficulties related to specification of produced services and identification of cost drivers. Medical practices oftentimes produce hundreds of unique services during a typical year, and the lack of any standardized valuation across these services makes it difficult to quantify total production. What is unknown in the art are processes and methods for full and accurate articulation of the medical practice's production in terms of standardized units, which utilizes these units as the cost driver for allocating the practice's operating costs to the produced services.
In 1989, the United States Congress authorized the creation of a national physician fee schedule for Medicare services. The initial research supporting this fee schedule was performed for the Health Care Financing Administration (now Centers for Medicare and Medicaid Services) by researchers at the Harvard University School of Public Health. The initial Resource Based Relative Value Scale (RBRVS) resulted in the development of resource-requirement values for more than 7,000 physician services which, when combined with a national “conversion factor” and regional price adjustments, translated the RBRVS scale into a physician services fee schedule. The RBRVS fee schedule was initiated on Jan. 1, 1992 for selected procedures and fees and was successively expanded to full implementation effective Jan. 1, 1996. The 2006 version of the RBRVS now provides values for more than 10,000 physician services, along with national and regional pricing adjustment factors. Ongoing research and input from numerous professional and public organizations contributes to interim updates of the RBRVS, with prevailing values published annually in the Federal Register. RBRVS information is available directly from the Federal Register, the Centers for Medicare and Medicaid Services (CMS), or several value-added private publishers.
The RBRVS scale provides standardized values for distinct, resource-defined components of the medical service production process for services defined by descriptions of medical procedures with assigned numeric codes and other explanatory material used for describing and reporting of physician services provided under the service name CPT (Current Procedural Terminology) codes (provided by the American Medical Association of Chicago, Ill.). The standardized values assigned to these components and to the summation of these components are generally referred to as Relative Value Units (RVUs). The RBRVS scale is composed of three distinct components for each service: Physician Work (RBRVS_Work), Practice Expense for both facility and non-facility service locations (RBRVS_Practice), and Malpractice Insurance (RBRVS_Liability). RBRVS scale components combine to produce a total for facility and non-facility service locations (RBRVS_Total) for a specific CPT-defined physician service. The RBRVS representation of the RVUs for a medical procedure is simplistically represented as follows:RBRVS_Total=RBRVS_Work+RBRVS_Practice+RBRVS_Liability.
The RBRVS is a dynamic scale providing RVU values for many, but not all, medical procedures. Some services are included in the RBRVS, but are assigned RVUs of zero, as the production of those services is considered incidental to the resources represented in other services. Practices may offer unique services that are not included in CPT definitions and, therefore, not included in the RBRVS. Sometimes new services are developed and introduced into the RBRVS and, at other times, services become obsolete and are removed from the RBRVS. The manner in which a procedure is performed may change over time, affecting the resources required to produce the service. For reasons such as these, the RBRVS provides RVU component weights for medical services for a specific time period (RVU Year).
RBRVS does not provide RVUs for most procedures that are performed in an exceptional manner or circumstance. Such variations in procedures are indicated through the use of Modifiers that oftentimes imply important differences in the resources required to perform a service and similar differences in the reimbursement generated by the altered service.
Location of Service is an important determinant of Practice Expense, as evidenced in the RBRVS differentiation between facility and non-facility service sites. The correct RBRVS_Practice value reflecting the procedure's Location of Service must be utilized to accurately represent the Practice Expense resources involved in the service's production.
Accurate specification of the practice's production is compromised or invalidated if valid CPT-defined services are excluded, Modifiers are disregarded, or Location of Service is ignored or incorrectly specified. Failure to fully and accurately define the services produced by the practice adversely affects the quantification of RVUs representing the practice's production, leading to faulty determinations of production, costs, and margins. Accurate representation of the practice outputs as RVUs requires procedure-specific, location-specific, modifier-adjusted (PLM) calculation of RVUs for all valid CPT procedures performed by the medical practice.
Thus, there is a desire and a need in the art to provide a process for accurate calculation of RVUs by including all valid services in the determination of medical practice outputs, permitting the selection of RVU weights from CMS-published RVU weight tables including Location of Service as an attribute of output, calculating Modifier-adjusted RVU values, and recognizing all of these effects in the calculation of the PLM RVUs that represent the practice's services during the Reference Period.